FHA-the Good Guys
Don’t have much down payment? Credit scores not the best? Have many, many bills? If these apply to you and you still want to buy a house and have enough income, then FHA may be the loan for you. FHA has been providing loans for 80 years and is still going strong. In fact, during this recent recession, FHA has often been the only available source for mortgage funds as other banks hoarded their funds. In the past few years, FHA has provided about half of all new mortgages.
In fact, In 2010, FHA provided 56 % of loans for all first-time home buyers, and 60 percent of all African-American and Hispanic home buyers. In addition, 85% of borrowers obtaining homes at the higher loan limits had incomes below $150,000, and nearly 65% had incomes less than $100,000.
FHA, Federal Housing Authority, was established by the US government in 1934 to help buyers get mortgages so they could purchase homes. FHA does not originate mortgages, but FHA provides a guarantee, backed by the faith and credit of the US government, so that lenders using the program are more inclined to provide the money as the risk to them is much less.
Since FHA has been around for so long, over the years various myths and untruths have circulated among potential buyers and sellers.
1. FHA is Bankrupt-WRONG
Because recently so many buyers are using the FHA program to purchase homes, the idea that FHA must be bankrupt or will go bankrupt has emerged. How can the government underwrite so many loans? What if we have another downturn? Will the government be on the hook for trillions of dollars if can’t pay?
This is a complete myth. It’s especially ridiculous because at this very moment FHA’s current cash reserves total $33.7 billion – a $400 million increase from a year ago. These reserves are fully capitalized to pay 30 years’ worth of expected claims and losses. By comparison, the Financial Accounting Standards Board only requires private financial institutions to hold reserves for losses over the next 12 months. FHA has 30 times that amount in their cash reserves, plus another $2.55 billion in the excess capital reserves.
So, adios to that idea. FHA is totally solvent.
2. FHA Was Hit Hard By Foreclosures-WRONG
Many, if not most, banks were hit hard by the current recession, so FHA must have suffered more than most. This is a companion myth to the FHA is bankrupt.
Here’s the real skinny. Yes, FHA was hit by foreclosures; it did have to guarantee some bad home loans. But, the reality is that most of those loans were the older ones, written pre-2006. These loans represent less than 25% of FHA’s portfolio. Realty is 75% of FHA loans were written after 2009 and have superbly good rates of payment.
Loans originated in 2010 & 2011 have the best performance in the 13 year history of the Neighborhood Watch data system with a seriously delinquent rate of 1.85%. Loans originated in last two years now comprise only 7% of the seriously delinquent loans in FHA’s portfolio.
3. New Higher Loan Limits Are Much Riskier-WRONG
As prices on properties began to rise, especially in states like California and New York, many would-be FHA buyers were shut out as loan limits were very low for those areas. So, Congress approved higher loan limits for selected areas. As usual, naysayers grew frightened, reasoning that higher loan amounts put FHA at higher risk.
Here’s the problem with that reasoning. Actually, higher loan amount on the more expensive homes tend to perform better than on the lower-priced homes. This makes sense as you realize that buyers had to qualify for these homes and so have higher incomes and most likely more assets and savings in cash of difficulty.
4. FHA Buyers Are Poor Risks-WRONG
FHA borrowers in FY 2011 have an average credit score above 700. This is the first time the average credit score for FHA borrowers broke the 700 mark. FHA credit quality has improved steadily since 2007, 4th quarter. Over 50% of FHA loans made in every quarter since 2009 (2nd quarter) had credit scores above 680. In 2006 and 2007, only about 20% of the FHA loans insured in 2006-2007 had credit scores above 680.
That’s all well and good, but the great thing about FHA is that those with lower credit scores, but decent income can also qualify as FHA programs are very flexible. And, yes, the down payment required is still 3.5% of the purchase price, though with various FHA fees that amount to more like 7%, still the lowest around. Viva FHA!